In re: Jan Mary Wallace
AZ-15-1319-LJuF
| 9th Cir. BAP | Oct 14, 2016Background
- Jan Wallace arranged a $1.5 million bridge loan from Thomas & Wong (T&W) to BDV Investments; she agreed to act for T&W in limited capacities (holding funds, joining BDV’s board, viewing collateral).
- T&W wired $799,960 into a Cane O’Neill trust account in Wallace’s name; Wallace agreed not to disburse funds without T&W’s consent but authorized several transfers without T&W’s knowledge (including $275,000 and $20,000). She also received $50,000 from loan proceeds as a deposit on sale of a shell company.
- Wallace misrepresented that she had personally viewed gold doré collateral and that T&W was protected by safekeeping receipts, an opinion letter, and insurance—none of which existed for T&W.
- BDV defaulted; T&W realized limited collateral (about $433,000 plus small sums) but suffered a large loss. T&W sued Wallace in state court for breach of fiduciary duty and obtained a judgment for $1,306,144.
- Wallace filed bankruptcy; T&W sought a determination that the state-court judgment was nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (4), and (6). The bankruptcy court held the judgment nondischargeable under (a)(2)(A) and partially under (a)(4); Wallace appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing of T&W to sue in bankruptcy | T&W is a judgment creditor entitled to sue for nondischargeability | Wallace challenged T&W’s corporate existence and standing based on wire-origin discrepancies | T&W has standing; Wallace waived factual challenge at trial and parties stipulated T&W is a judgment creditor |
| §523(a)(2)(A) statute of limitations | §523 claim timely under Rule 4007 and prior state action preserved claims | Wallace argued state statute of limitations barred late fraud claims in bankruptcy | §523(a)(2)(A) claim not time-barred; bankruptcy timing tied to Wallace’s filing and Ninth Circuit precedent permits action |
| Nondischargeability under §523(a)(2)(A) (fraud by omission/false representation) | T&W: Wallace, as agent, omitted and misrepresented material facts, intended to deceive, T&W relied and was damaged | Wallace: disputes agency, intent, materiality, and reliance; claims she lacked motive and did not benefit | Court found Wallace was agent, made material omissions/misrepresentations, intended to deceive; reliance and proximate causation established; judgment nondischargeable |
| §523(a)(4) fiduciary capacity (fraud/defalcation) | T&W: express trust existed as to $799,960 in Cane O’Neill account; Wallace as trustee breached fiduciary duty | Wallace: no formal trust document, law firm (not Wallace) was trustee, funds came from entity other than T&W | Court found an express trust under Arizona law as to the $799,960 trust res and nondischargeability under §523(a)(4) limited to that amount |
Key Cases Cited
- Sabban v. Ghomeshi, 600 F.3d 1219 (9th Cir. 2010) (elements of fraud to establish nondischargeability under §523(a)(2)(A))
- Apte v. Japra, 96 F.3d 1319 (9th Cir. 1996) (duty to disclose and reliance in nondisclosure cases under §523(a)(2)(A))
- Cohen v. De La Cruz, 523 U.S. 213 (U.S. 1998) (§523(a)(2)(A) bars discharge of all liability arising from fraud regardless of debtor's benefit)
- Field v. Mans, 516 U.S. 59 (U.S. 1995) (use of common-law disclosure duties in bankruptcy fraud analysis)
- Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986) (narrow definition of fiduciary for §523(a)(4) — express or technical trust required)
- Banks v. Gill Distribution Centers, 263 F.3d 862 (9th Cir. 2001) (timely state-court action preserves ability to pursue nondischargeability claims in bankruptcy)
- Gergely v. Lee-Benner, 110 F.3d 1448 (9th Cir. 1997) (state limitations on fraud irrelevant to dischargeability of an established debt)